UBS raises weighting on gold to ‘neutral’

Uncertainty in global markets caused by the US government shutdown has done little to lift the price of gold, a traditional safe-haven asset. But pundits are expecting the tide to turn.

Swiss-based investment bank UBS on Monday raised its weighting on gold to “neutral" from “underweight", citing the environment of low rates and increasing political risk in the US.

“If debt ceiling negotiations continue to be a concern, as seems likely, rates will fall and gold will rise, so we trim our ‘underweight’ on gold to ‘neutral’," the bank said in a note.

Equity market investors have remained cavalier in the face of the first US government shutdown in 17 years, which was sparked by US President
Barack Obama
’s refusal to make concessions on other items in the upcoming budget.

Key global indices including the Dow Jones, the FSTE 100 and the S&P/ASX 200 initially traded through the uncertainty, dipping only mildly since the shutdown came into play last Thursday.

But there are signs investors are becoming wary as the stalemate persists with increased buying of safe-haven currencies such as the Japanese yen and the Swiss franc. Gold is expected to rise next.

“If progress on debt negotiations maintains the current stalemate much longer, gold is likely to move back into the spotlight," ETF Securities analysts said in a note.

The precious metal traded flat at $US1322.64 on Tuesday morning, after gaining almost 1 per cent on Monday to $US1232.23 an ounce.

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On the same day UBS raised its rating of the precious metal, broker Morgan Stanley trimmed its gold price outlook for 2014 to $US1313 an ounce.

Goldman Sachs predicts prices will drop to $US1100 in 12 months, while Societe Generale predicts an average of $US1125 in 2014.

But demand from central banks is expected to remain strong. Central banks are expected to add as much 350 tonnes, or $US15 million, to their gold holdings this year, according to World Gold Council estimates. Broker Morgan Stanley expects central banks will buy another 500 tonnes by 2018.

Russia is leading the charge, increasing its reserves by 20 per cent, or 171 tonnes, since September 2011. Kazakhstan has added 67.2 million tonnes since 2011, while South Korea has purchased 65 tonnes.

Gold has declined more than 21 per cent over the year-to-date, while the value of gold exchange-traded ­products has dropped by more than $60.4 billion.

The US still remains the world’s largest holder of gold bullion, with 8133.5 tonnes and 72 per cent of the world’s total reserves valued at $US344.2 billion.